Poland’s economy defies political turmoil

Indeed, since Poles last went to the ballot box in September 2005 the nation’s economic growth has averaged over 6% with the country’s once chronic unemployment slipping from about 17% to 12%. At the same time, foreign investors have cast their vote in favor of the Poland’s economic future by splurging a record $11.09 million in direct foreign investment last year with a boom in stock market listings in Warsaw having helped to turn the Polish capital into a major financial hub in the region. Apart from rising wages and the spread of credit fuelling a surge in consumer spending, the privatization of small and medium state-owned companies over the years and moves to forge the development of a vibrant private business sector have combined to underpin long-term economic growth. To be sure, Poland’s economic success has more to do with the business conditions set in place over the years than the country’s ruling political elite with the election triggered by a series of cheap scandals and ultimately the collapse of Prime Minister Jaroslaw Kaczynski’s right-wing Law & Justice Party-led coalition.

Analysts agree Kaczynski’s government has tended to let the economy churn on with a degree of indifference and taken little interest in dialogue with the new business establishment that has emerged in Poland over the 18 years since the implosion of communism. “It is a sin of neglect, rather than a sin of reckless behavior,” said Mateusz Szczurek, Poland chief economist for the ING Bank. Nevertheless, this has raised concerns among some analysts that the Kaczynski coalition lacked a comprehensive view of how to manage the economy and its on-going transformation. What is more, with opinion polls pointing to the prospects of another weak coalition emerging after the election set down for October 21, the nation’s political fragmentation could soon become a risk to the future development of Central Europe’s biggest economy.

This in turn is also likely to rule out the new government pressing on with privatizing strategic industries such as the energy sector, or undertaking further economic reform including of the pension system or equally unlikely, making a firm commitment to joining the euro. In the meantime, who ever wins the election will inherent an economy facing an accumulating number of hazards with growth expected to slip back a gear next year as Poland’s key markets in western Europe lose momentum.

The Polish government expects the nation’s economic growth rate to slide to 5.5% next in 2008 from 6.5% last year. However, the danger for Poland is that the prospects of a decline in economic growth is emerging just as inflationary risks are growing and as a result sparking speculation that the nation’s central bank will add to the three rate hikes it has delivered this year by tightening again in the next six months. For the moment, Poland’s inflation rate remains within the central bank’s 2.5% target with its main interest rate currently standing at 4.75%. However, the nation’s current account is also starting to balloon out with the country also facing up to the growing economic threat posed by labor shortages and escalating labor costs. While unemployment in rural areas can top 35%, in Poland’s major urban center the jobless rate can be about half the national average as the flood of foreign investment helps to create new highly skilled jobs. In a bid to ease the growing pressure on the job market, the government is considering importing labor from as far afield as India or China in addition to workers from neighbors such as Belarus and Ukraine, who have reluctantly taken jobs in Poland.

Attempts are also being made by the central government to lure back the estimated two million people who left the nation after EU entry in search of higher wages and a new life principally in western Europe. The exodus has become the largest in Polish history. But with labor costs in Poland currently rising by about 10%, concerns are growing that the nation along with the other leading Central European nations that signed up for EU membership in 2004 could face growing competition for investment and exports from nations further to the east which have highly skilled workforces but where costs are cheaper. The trick for the new government in Warsaw will be somehow to try to kick a lid on labor costs while at the same time promoting employment so as to ease the nation’s jobless rate which continues to be the highest among the EU’s 27 states. (m&c.com)